Oligopolistic Equilibrium and Financial Constraints

Osaka University - Graduate School of Economics; National Graduate Institute for Policy Studies (GRIPS)

Date Written: September 27, 2015

Abstract

We provide a model of dynamic duopoly in which firms take into account the financial constraints of all firms. The study of the equilibria of our dynamic game leads to the concept of Bankruptcy-Free outputs (BF) in which no firm can drive another firm to bankruptcy without becoming bankrupt itself. We show that, in some cases, Cournot outputs are not a Markovian subgame perfect equilibrium because if these outputs were set, a firm may have incentives to ruin others. In these cases, standard trigger strategies in which collusion is sustained by infinite reversion to Cournot outputs cannot be used. We show that there is a Markov subgame perfect equilibrium in mixed strategies and study its properties. Predation occurs in equilibrium with a positive probability. Finally we adapt the folk theorem to our framework and show that it holds when minimax is taken over the BF outputs